PCI Says Bailout Bucks Give AIG Unfair Competitive Edge

By the time you read this, American International Group might have already reported a huge loss for its fourth quarter and a new deal to secure additional financial support from Uncle Sam.

However, for the record, at least one industry group--the Property Casualty Insurers Association of America--filed a complaint against any further federal support, urging Washington to rethink plans to give more bailout money to AIG, arguing that doing so would create an unfair competitive advantage for the carrier.

"Providing additional subsidized taxpayer loans to insurers who are also thrift holding companies could create unintended negative effects on consumers and the marketplace," said David Sampson, president and chief executive officer of PCI.

His comment was prompted by reports last week that AIG would announce a fourth-quarter loss that could reach $60 billion, and that the company was seeking additional government funding to prevent bankruptcy.

Calling AIG an "insurer that became a bank or thrift holding company," Mr. Sampson said the firm can get cheap federal loans through Treasury's Capital Purchase Program, and then shift this subsidized capital to their insurance affiliates. This would allow unhealthy insurers to grab more market share in the short term at levels that are unsustainable in the long term, he added.

"Such actions potentially not only undermine healthy competitors but also spread additional risk to bank or thrift subsidiaries receiving the federal money," Mr. Sampson argued. "This destabilization of the marketplace makes it increasingly impossible for the government to unwind the unsustainable market conditions it helped create."

He said "the unfortunate results for consumers and taxpayers are more risk, higher costs, less competition and an increasing reliance on government intervention and resources."

Healthy providers that lose market share to the competition would have to reduce employment and increase premiums to make up for lost revenues, he added.

"And even highly profitable and fiscally sound insurers would have a duty to their shareholders to line up for federal largesse to avoid being boxed into a competitive disadvantage," according to Mr. Sampson. "The vast majority of insurers, who are healthy and sound, do not currently need federal investment in their businesses."

New funding is reportedly needed to make up for write-downs AIG took on a variety of assets, including commercial real estate. Without additional capital, such a loss would likely trigger further downgrades in its insurance and credit ratings, forcing AIG to put up additional collateral it doesn't have, and thus setting the stage for a potential bankruptcy filing.

As this edition went to press, AIG had confirmed the company was in talks with federal regulators about getting another cash infusion. "We continue to work with the Federal Reserve Bank of New York to evaluate potential new alternatives for addressing AIG's financial challenges," said an AIG representative, Peter Tulupman.

The Treasury Department did not respond to requests for comment.

The Treasury and the Federal Reserve have already provided over $150 billion in assistance to AIG since a Sept. 17 agreement in which AIG ceded a 79.9 percent share of its stock in return for federal aid. CNBC reported that talks between the government and AIG are focused on how the company can swap some of the debt held by the government for equity in AIG.

PCI complains that federal bailout funds allow unhealthy insurers to grab more market share in the short term at levels that are unsustainable in the long term.